On August 6, 2013, the Quebec Court of Appeal rendered a very interesting decision in the case of Anglo Pacific Group plc v. Ernst & Young Inc., 9261-0690 Québec Inc., Northern Star Mining Corp. and Jake Resources Inc.
This decision is interesting in several respects, but particularly because of the court’s analysis of the legal nature of a royalty agreement concluded in the context of Quebec mining law, and also as regards the court’s ruling on the effects of its publication in the Public Register of Real and Immovable Mining Rights,a register maintained under the Mining Act (Quebec) (“Mining Register“).
The debtors, Northern Star Mining Corp. and Jake Resources Inc., two gold exploration companies operating in Val d’Or, held mining claims and planned to begin extracting and exploiting ore for processing in their refinery. When the financing was extended by Anglo Pacific Group plc, the debtors signed a document entitled Senior Secured Convertible Debenture to which was attached a royalty agreement. At the time, the debtors did not yet hold a mining lease, in other words they did not yet have the right to extract the ore. Before entering into a mining lease, the debtors became insolvent and their assets had to be sold. At trial, the Superior Court found that, in the context of a vesting order under section 243 of the Bankruptcy and Insolvency Act (Canada), the purchaser acquired the property free of the royalty agreement. The Court of Appeal affirmed this judgment on this point. The court analyzed the royalty agreement under Quebec civil law, and it is this analysis in the judgment that we will be considering here.
Firstly, the court had to decide whether the royalty agreement created real rights or personal rights, in order to determine whether these rights were extinguished by the bankruptcy and sale of the underlying assets, or if they benefited from a right to follow the property into the hands of the third-party purchaser.
At the outset, the court noted that the civil law is a complete system and that we must avoid adopting principles from foreign legal systems without questioning whether they are compatible with our law, a principle previously laid down by the Supreme Court of Canada in the case of Farber v. Royal Trust Co. This warning by the court turned out to be necessary because, in its arguments, the appellant was attempting to import common-law principles applicable to mining royalties.
Noting that a real right is a right in property, and not against a person, the court found that the terms of the royalty agreement under review did not have the effect of creating a real right in the minerals at the stage of the mining claim. It failed to do so because it did not confer a direct right in the minerals, as it did not give the claim holder the right to use them directly, or to enjoy or dispose of them. The payment of the royalties was subordinate to the sale by the debtors of the extracted or processed minerals. The court therefore found that the royalty agreement only created a personal right to collect the royalties.
From a strictly legal standpoint, this conclusion is not surprising considering the requirements in the Civil Code of Quebec (“Civil Code“) for the creation of real rights and dismemberments of the right of ownership.
The surprising element in this decision is that the court suggests, in an obiter dictum, that it would however be possible for a royalty agreement to create an innominate real right, that is to say a dismemberment of the right of ownership that is not expressly referred to in the Civil Code (such as usufruct, the right of use, servitude and emphyteusis). The court stated that it would be sufficient if the agreement granted a real right in the thing having one of the essential attributes of property – namely, the right of use (usus), the right of enjoyment (fructus), or the right to freely dispose of the property (abusus), as well as a right to follow the property in the event of a sale thereof.
[office translation] At a time when mining law is promising to become a driving force of the Quebec economy, the civil law must adapt without undermining the foundations of the right of property and without obscuring the conditions for the creation of a real right behind the economic and legislative reality associated with mining law. The civil law is sufficiently flexible to permit the holder of a mining claim — a potential owner of extracted minerals — to confer a real right not only in the claim, but also in the extracted minerals in respect of which the owner will obtain a right of ownership once a mining lease is granted.
The court’s position is particularly surprising because the debtors only held mining claims in this case. Indeed, a claim, while characterized as a real and immovable right in the Mining Act, is, in essence, temporary and only confers on the holder thereof an exclusive exploration right limited to certain minerals.
To reach this finding, the court drew a parallel between a hypothec on future rights, which is possible under Quebec law, and the potential right of the beneficiary of a mining claim to obtain a mining lease. This is only a potential right because the conditions for the issuance of the mining lease provided for in the Mining Act must first be met. It is the mining lease, once obtained, that confers on the holder the rights and obligations of an owner, including the right to extract and sell the minerals.
The court then concluded that it would theoretically be possible for a royalty agreement to grant an innominate real right directly in the minerals that are eventually extracted if the holder of the claim subsequently becomes the holder of a mining lease. This would be a kind of innominate real right granted under suspensive condition that a mining lease be obtained in the future. The court is therefore opening the door to a new type of royalty agreement. Drafting such an agreement is another matter!
Secondly, the appellant maintained that the publication of the royalty agreement in the Mining Register exempted it from registration in the land register to be enforceable against third parties. On the other hand, the respondent and the impleaded party argued that the failure to register the agreement in the land register made it unenforceable against them.
Without commenting on the effect of the publication of a personal right on third parties, which would have been interesting, the court concluded that the sole effect of the publication of a right in the Mining Register is to render this right enforceable against the State, and that, to be enforceable against third parties, the royalty agreement should have been registered in the land register through registration in the Register of Real Rights of State Resource Development, since this register is an integral part of the land register.
Questions may be raised regarding the impact this judgment will have on the registration in the land register of such an innominate real right at the stage of the mining claim, and on the enforceability thereof against third parties and other creditors, given that exploration rights such as mining claims are in fact exempted by the Mining Act (Quebec) from registration in the land register, precisely in order to avoid the cluttering of the land register with registrations relating to mining exploration.
On March 28, 2024, the Department of Finance Canada announced a one-year extension to the 15% Mineral Exploration Tax Credit (“METC”) available to investors in flow-through shares. The extension means that the METC will be effective until March 31, 2025. This announcement came at a time when uncertainty loomed over the industry and some stakeholders feared that the government would not renew the METC. Over time, this tax credit has become a key component of flow-through share financings. It is intended to enhance the tax deductions already available to flow-through share holders and ultimately help companies raise capital for mineral exploration. The METC was last renewed in 2019 for a five-year period, indicating the government’s long-term commitment to the sector at that time. And while this renewal is welcome news for exploration companies, it should be noted that the shorter one-year horizon of the extension does not provide the same assurance regarding the incentive’s future. It is possible that this one-year renewal reflects the government’s intention to promote the new 30% Critical Mineral Exploration Tax Credit (“CMETC”) instead, on which more information can be found here: Federal Budget 2022: Good News for Mining Exploration Companies! In closing, it is important to note that the one-year extension to the 15% METC will not affect the period during which the 30% CMETC is available for critical mineral exploration, which will end on March 31, 2027, and is subject to renewal. If you were planning on financing non-critical mineral exploration, you may want to complete this transaction in the coming year in order to benefit from the 15% METC. Our team of professionals specializing in securities, mining law and taxation is available to answer any questions you may have concerning this new measure and to guide you in arranging a successful flow-through financing.
November 1, 2023Canada’s finance minister unveiled a series of legislative proposals on August 4, 2023 aimed at making significant changes to the flow-through share regime, particularly as regards lithium exploration. Although a number of these changes had already been announced in the 2023 federal budget, e.g. the inclusion of lithium brine in the “mineral resources” definition, they had not really affected junior exploration companies in Quebec since this type of lithium is virtually non-existent in the province. More targeted change However, the recent proposals include a more targeted change for mining companies exploring for traditional “hard rock” lithium, which is much more common in Quebec. These proposals include amending the definition of “mineral resources” to systematically includetraditional hard-rock lithium in the list set out in section 248 of the Income Tax Act (the “Act”). The consequences As a consequence of this change, the requirement for mining companies to obtain a certificate issued by Natural Resources Canada will be eliminated. The application process for this certificate represented a heavy administrative burden for exploration companies. Moreover, lengthy processing times often delayed the conclusion of flow-through share subscription agreements. This change is a timely one: growing numbers of companies are refocusing on exploring for lithium rather than for more traditional metals such as gold. This reflects not only the market’s infatuation with lithium, but also the recent 30% tax credit potentially available to investors incurring mining exploration expenses involving critical metals. Proceed with caution For the time being, however, these legislative proposals only apply to lithium; they do not cover all critical minerals. Mining exploration companies should proceed with caution if they plan to explore for other types of critical minerals such as graphite and rare earth elements, for example. This is because a mineral resources certificate issued by Natural Resources Canada may still required in those cases. Our team of professionals specializing in securities, mining law and taxation is available to answer any questions you may have concerning this new measure and to guide you in arranging a successful flow-through financing.
May 10, 2023On March 21, 2023, Quebec’s Minister of Finance tabled his budget for the 2023-2024 fiscal year. One of the budget’s key measures is the introduction of a new tax holiday in connection with major investment projects. At first glance, the new measure does not appear to be specifically aimed at the mining industry, but some mining companies involved in the extraction of critical and strategic minerals and planning substantial investments in the near future could greatly benefit from it. Under the new tax exemption, a corporation or partnership that carries out an investment project of more than $100 million in Quebec will be eligible, under certain conditions, for an income tax holiday and a holiday from the employer contribution to the Health Services Fund. As far as income tax is concerned, this new 10-year tax holiday consists of a deduction in the calculation of the company’s taxable income. The deduction is calculated by applying a rate of 15%, 20% or 25% to the cumulative total of eligible project expenditures. Since this tax measure is intended to promote investment outside major urban centres, the rate will vary according to the project’s location, ranging from 15% for projects in areas with high economic vitality, to 20% for projects in areas with intermediate economic vitality and up to 25% for those in areas with low economic vitality. The higher rates of 20% and 25% are more likely to apply to mining projects, which are generally located in remote areas with lower economic vitality. The critical and strategic minerals identified in the context of this measure are the following: antimony, bismuth, cadmium, caesium, copper, tin, gallium, indium, tellurium, zinc, cobalt, rare-earth elements, platinum-group elements, graphite (natural), lithium, magnesium, nickel, niobium, scandium, tantalum, titanium and vanadium. Let’s briefly consider the example of a mining company carrying out a major investment project for lithium mining in the Nord-du-Québec administrative region, designated by the Quebec government as a territory with intermediate economic vitality. During the investment phase, while the mine is being developed and built, the company incurs $200 million worth of eligible expenditures, which are capital expenditures for new mining equipment and heavy machinery for lithium extraction and processing. Evidently, the company will probably sustain a loss during the investment phase, and, because it has no taxable income, it will not be able to immediately benefit from the tax holiday. However, should the company have taxable income of $50 million in year 5, after four years of investment and mine development, it will be able to deduct $40 million of this taxable income under the new tax holiday, reducing its taxable income to $10 million for that year. This $40 million deduction is based on the application of the 20% rate for territories with intermediate economic vitality to the $200 million of eligible expenditures for the mining project. Another point relevant to the mining industry is that the income tax holiday will apply only to tax payable under the provisions of the Taxation Act. In other words, this tax holiday will not reduce the amounts payable under the Mining Tax Act. With respect to the Health Services Fund, companies will generally be eligible for an employer contribution holiday on wages paid to employees for pay periods falling within the exemption period for major investment projects. In order to benefit from this new tax holiday, companies will have to obtain an initial certificate, as well as annual attestations issued by the Quebec Minister of Finance. Our team of professionals specializing in mining and tax law is available to answer all your questions regarding this new measure and to assist you in your mining investment projects in Quebec.
April 11, 2022On April 7, 2022, Finance Minister Chrystia Freeland tabled the federal government’s new budget for 2022. This budget includes several tax measures relevant to the mining industry in Canada. The Canadian federal government intends to provide $3.8 billion over eight years to implement Canada’s first critical minerals strategy. One of the methods used to implement this new strategy and stimulate exploration is an investment vehicle well known to the mining industry: flow-through shares. The 2022 budget proposes to create a new 30% Critical Mineral Exploration Tax Credit (CMETC) for certain specified minerals. Specified minerals that would be eligible for the new CMETC are: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium. As for the regular mineral exploration tax credit, the exploration expenses must have been incurred in Canada. The renunciation of expenses must also have been made under flow-through share agreements entered into after budget day and before March 31, 2027. It is important to note that there will be no cumulation of tax credits. Eligible expenditures will not be eligible for both the proposed new CMETC and the 15% regular mineral exploration tax credit (METC). In order for exploration expenses to qualify for the CMETC, a qualified person (as defined in National Instrument 43–101 issued by the Canadian Securities Administrators) will further have to certify that the expenses renounced will be incurred in the course of an exploration project for specified minerals. On this point, the measure seems to insert a new legal test of “reasonable expectation” that the minerals targeted by the exploration are “primarily specified minerals”. No details have yet been issued on the mechanics of applying this test. However, if the qualified person is unable to demonstrate that there is a reasonable expectation that the minerals targeted by the exploration project are predominantly specified minerals, the related exploration expenses would not be eligible for the CMETC and consequently, any credit granted for ineligible expenses would be recouped from the flow-through share holder who received the credit. Pending the tabling of a more detailed legislative version, careful attention and planning will therefore be required for new flow-through share financings to ensure that they meet the legal criteria for this new tax credit. Our team of professionals in securities, mining law and taxation is available to answer all your questions regarding this new measure and to assist you in the implementation of a successful flow-through financing: Josianne Beaudry René Branchaud Ali El Haskouri Charles-Hugo Gagné Éric Gélinas Sébastien Vézina